Fisher Center for Real Estate and Urban Economics

Options are a major component of corporate compensation and accounting methods significantly aspect allocations, yet valuation remains a challenge. We develop the first empirical model of employee exercise suitable for valuation, and estimate the exercise rate as a function of stock price and employee characteristics in the first sample of all employee exercises at over 100 firms. These characteristics significantly affect exercise behavior and cost, in ways that Black-Scholes-based approximations used in practice fail to capture. For example, exercises are slower, and option cost greater, at firms with higher market correlation; top-decile option holders within a firm exercise faster than lower-decile holders; and men exercise faster than women, resulting in 2 to 3% lower cost.